When viewed from a distance, Social Security seems pretty straightforward. When you work, you are required to pay into the system. Upon retirement, you can collect from it. It is true in general, but the specifics of how it is designed gives you some flexibility in how you collect the money and how you use it.
So, to be able to bankroll your retirement with Social Security, you can use a variety of strategies. It would be best if you began planning early since some require pre-planning. Using Social Security as part of a broader plan can be leveraged through these three strategies.
1. The default: Use the money
By default, if you don’t plan, you’ll end up filing to collect Social Security only to spend the money. This can be minimal use of the money, even though it is perfectly acceptable. The average retiree receives about $1,671 from Social Security every month.
Congratulations — if that’s enough to cover your lifestyle, you’ll be fine. The amount is enough to keep one person above the poverty line in all 50 states, and it may be enough to get you through retirement if you do not expect a lavish lifestyle or have high base expenses.
It was never intended that Social Security would provide all of your retirement income, and having another source of income opens up the possibility of better Social Security strategies.
2. Increase your monthly income by delaying
You can decide when to begin collecting your Social Security benefits. Once you turn 62, you have the option to start receiving payments at any time. By waiting until 70, your benefit will be higher. There are two ways in which this helps.
It is important to note that Social Security payments provide a guaranteed source of income to its beneficiaries as long as the Trust Funds last. After those trust funds run out, if nothing else changes, recipients will receive around 75% of what they are expecting.
Additionally, Social Security recipients receive an annual inflation adjustment based on their previous benefit level, and a higher monthly benefit amount will result in a larger inflation adjustment.
As a trade-off, you’ll have to work longer or fund more of your early retirement costs with your other finances if you wait to collect Social Security. Delaying your claim may cost you more money over your lifetime if you live a shorter life than expected.
3. Convert Roth IRAs with the money from early filing
Having a decent amount of money in traditional retirement accounts, you might consider transferring some of it to a Roth IRA before you reach 72. Roth IRAs do not require required minimum distributions once you reach 72, but most retirement accounts do. Roth IRAs also allow money to compound tax-free for the rest of your life and can be passed on to your children more tax-efficiently than traditional retirement accounts.
You must pay taxes on the money you convert when you convert to a Roth IRA, and it is possible to keep that much more working for you in your tax and RMD-free Roth IRA if you can cover those conversion taxes with cash outside the IRA itself. Therefore, taking your Social Security money early and using it to cover your Roth IRA conversion taxes is a great way to get more money in your Roth IRA earlier in your retirement.
As always, there are trade-offs. First, taking your Social Security early will reduce your monthly benefit amount. Second, you must wait five years after you first fund a Roth IRA (directly or via conversions) before withdrawing your earnings tax-free. Therefore, it helps if you already have a Roth IRA or are sure you won’t need to tap it before five years.
You have choices if you plan.
Depending on your plan, you can spend your Social Security benefit, delay your claim, or use it to increase the amount of your Roth IRA. Whichever option you choose, the earlier you get started with your end-to-end retirement plan, the greater your chances of success. Start leveraging Social Security now to fund your retirement and maximize your benefits.